SEOUL – The central banks of major advanced economies have been navigating uncharted territory in recent years. While their use of a range of unconventional monetary-policy tools has had benefits, it has also generated significant uncertainty, without fully stabilizing the world economy. Now the time has come to head back toward more familiar policy terrain.

Following the 2008 financial meltdown, the US Federal Reserve cut the policy rate to almost zero and pursued so-called quantitative easing (QE), by purchasing long-term securities from the public and private sectors. The central banks of the European Union, Japan, and the United Kingdom soon launched similar unconventional programs. The result was a vast amount of cheap liquidity that helped to stabilize the financial sector, restore stock and real-estate prices, and increase domestic demand. All of this helped to limit the fallout of the financial crisis and push the global economy toward recovery.

But this aggressive approach has its limits. Indeed, as Reserve Bank of India Governor Raghuram Rajan has pointed out, after years of effort, the benefits of unconventional monetary policy are diminishing, while the costs are increasing. Recognizing this, the Fed ended QE at the end of last year and raised its policy rate by 25 basis points. The rate hikes will likely continue this year, though the speed and extent of the increases are uncertain.

Yet the European Central Bank and the Bank of Japan (BOJ) have decided to sustain their QE programs. Moreover, they have adopted a negative interest-rate policy – which amounts to charging a fee for bank reserves – to revitalize depressed demand. Unsurprisingly, the effects on inflation and real output have been limited.

Monetary policy is an effective means of managing inflation and can boost employment and output in a recession. Lowering interest rates below zero, however, has hurt banks’ balance sheets, reducing their lending capacity. As a result, it has failed to increase business investment.

Even low positive interest rates, if maintained for a prolonged period, could backfire, fueling asset bubbles and enabling household and corporate debt to grow to unsustainable levels.

Meanwhile, asset purchases have caused the balance sheets of major central banks to swell to unprecedented levels. The orderly rewinding that is now needed will be very difficult to manage.

Beyond the domestic sphere, unconventional monetary policies have had far-reaching spillover effects. In particular, they have sent emerging economies, with their financial links to advanced economies, on a capital-flow roller-coaster ride.

First, the emerging economies were flooded with liquidity flowing from the advanced economies. Large capital inflows led to overheating and inflation, asset-price bubbles, and rapid currency appreciation. Then, the Fed’s tapering of QE led to the sudden withdrawal of that capital, creating a risk of financial disruption and currency crises. The emerging economies’ monetary authorities have struggled to cope with these shocks using available instruments, including interest rates, exchange rates, prudential regulation, and capital controls.

But that is not all. Because advanced economies’ unconventional monetary policies have also depreciated their currencies and stimulated their exports, the risk of competitive devaluations is now a real concern. If, say, the BOJ moved to intervene outright in the exchange-rate markets to depreciate the yen, the odds that the People’s Bank of China and the Bank of Korea would opt for weaker currencies would increase. All of this would be highly destabilizing, particularly for emerging economies like Brazil that are facing a brutal combination of internal and external challenges.

Instead of viewing all of this as motivation to back away from unconventional monetary policy, however, some economists are recommending that the ECB and the BOJ pursue an even more extraordinary policy: so-called “helicopter drops.” The idea, introduced by the Nobel laureate economist Milton Friedman in 1969, entails the distribution of freshly printed money directly to the public, with a commitment from the central bank never to withdraw it. As Former Fed Chairman Ben Bernanke points out, monetary finance is essentially equivalent to a broad-based tax cut, with the central bank committing to purchase government debt.

Among the influential economists advocating helicopter drops for Europe and Japan are Bernanke, Willem Buiter, Kemal Derviş, and Adair Turner. They argue that even if it is not an ideal solution, it can cure their economies. For governments restrained by high public debt and deficits, the proposal is certainly tempting.

But helicopter drops are highly risky. As Bernanke himself warns, such a policy could undermine central banks’ long-term independence. Moreover, it would enable governments to monetize fiscal deficits without constraints, and potentially to abuse money-printing power for political considerations. And it might not even work as intended, with the money benefiting only certain groups. Given the difficulty of regaining lost sovereignty and credibility, central banks must keep helicopter drops as a last resort.

The reality is that recourse to easy windfalls produced through loose monetary policy could have serious long-term repercussions, especially if they are used to delay efforts to address underlying issues. Japanese Prime Minister Shinzo Abe’s economic revitalization strategy – so-called Abenomics – is a case in point. The strategy was supposed to use a mix of monetary and fiscal expansion to help facilitate structural reforms. Yet the reforms have faced delays, and employment and output growth has been limited.

What advanced-country central banks should be doing now is implementing monetary policies aimed at restoring their credibility, while governments focus on implementing effective fiscal policies and structural reforms. Crucially, advanced and emerging economies must coordinate their policies, in order to foster confidence and strengthen growth. This is the only way back onto the path of sustained global economic health.

Last month, finance ministers and central-bank governors of the G-20 countries acknowledged the limitations of monetary stimulus and embraced structural reforms, infrastructure investment, and fiscal policy as the key to future growth. But they have yet to back their words with strong action. Their credibility – not to mention the fate of the global economy – is on the line.

DEBT levels grew spectacularly in the rich world from 1982 to 2007. When the financial crisis broke, worries about the ability of borrowers to repay or refinance that debt caused the biggest economic downturn since the 1930s.It could have been worse. The danger was that, as private-sector borrowers scrambled to reduce their debts, the resulting contraction in credit would drive the world into depression. Fortunately, this outcome was averted. First, the governments of rich countries allowed their debts to rise, offsetting the reduction in private debt. In addition, emerging markets (notably China) continued to borrow. So there was no global deleveraging; quite the reverse (see chart). Central banks also helped, slashing interest rates to zero and below. Although lower policy rates have not always resulted in cheaper borrowing costs (in Greece, for example), debt-servicing costs have fallen in most developed countries.Although this approach has staved off disaster, it has not got rid of the problem, as a research note from Manoj Pradhan, an economist at Morgan Stanley, makes clear. “High debt forces interest rates to stay low, which encourages yet more debt,” Mr Pradhan writes. Central banks dare not push interest rates up too quickly for fear of causing another crisis; hence the stop-start nature of the Federal Reserve’s statements on monetary policy. The developed world seems stuck with sluggish growth and low rates.In health terms, the disease is chronic, not acute. A lurch into another global crisis, Mr Pradhan reckons, would require three ingredients. First, the assets financed by the debt build-up would need to fall sharply in price or prove uneconomic. Second, the debtors would have to be concentrated in big, globalised economies. Lastly, global investors would have to be heavily exposed to the debt in question. All this was the case in 2007-08, as debt secured by American housing turned bad, raising doubts about the health of the Western banking system.This time round the debtors are in different places. Some of them are emerging-market governments and commodity producers. But, except for China, none of these is crucial to the world economy. And China’s debts are mainly in domestic hands, rather than widely dispersed in the portfolios of international banks, pension funds and insurance companies.Large, rich countries are systemically important, and their government debt is at the heart of most institutional portfolios. If a President Trump were to follow through on his confusing statements about buying back Treasury bonds for less than face value, that would trigger a crisis. In the absence of such a cataclysm, and with the support of central banks, governments that have borrowed in their own currency should not face an imminent problem.But that doesn’t mean getting rid of the debt will be easy. Debt has been inflated away in the past, but central banks are still struggling to meet their current inflation targets of 2% or so. It is not clear that governments, which set the mandates central banks must follow, would be willing to put up with the high rates of inflation needed to reduce the real value of debt substantially, even if central banks could find a way of generating it. Debt forgiveness (the old idea of a jubilee) sounds good in theory. But writing off either private-sector or government debt could cripple the financial sector, creating the very crisis the measure was designed to avoid.Morgan Stanley has some alternative suggestions. One would be to replace debt with equity-like capital. In the public sector, governments could issue GDP-linked bonds, akin to the inflation-linked debt that America, Britain and others already offer. If a bond’s repayment value is linked to real GDP, then governments would be spared the crippling surge in debt-to-GDP ratios that occurs during recessions. Governments could also issue irredeemable debt, or “consols”, which eliminate the risk of a refinancing crisis.In the private sector, equalising the tax treatment of equity and debt would be a good idea, although tricky to implement. Creating “shared-responsibility mortgages”, in which lenders take an equity stake in the homes they finance, would make borrowers less vulnerable to house-price declines.All these ideas seem sensible, but they can be applied only to newly issued debt, not to the mass of obligations that has already been accrued. So they will help only over the long term. The next global debt crisis will almost certainly occur before they become widespread.

During a lengthy interview on CNBC the week before last, Donald Trump, fresh from becoming the presumptive Republican nominee, came as close as any major presidential contender ever has to saying that America is not capable of repaying her debts in full, and that our path to economic recovery might involve some pain for our creditors. This moment of candor earned Trump almost as much condemnation as his earlier suggestions to ban Muslims from entering the United States.

To many, the idea that U.S. debt obligations involved even the slightest risks to investors was both the height of financial naiveté and the epitome of political recklessness. The pressure was so great in fact that The Donald, who has consistently refused to engage in even the most sensible strategic retreats, appeared on CNN last Monday to "clarify" his earlier remarks. However, he ignited another firestorm when he inadvertently let slip another unspoken truth, namely, that the United States can always print however much money she needs to "repay" her debt. Apparently the only acceptable position to hold on this issue is to completely deny reality.Despite his public image as a premiere pitchman, marketeer, and builder of glitzy gold towers, Donald Trump owes his business success to his ability to walk into a roomful of people to whom he owes money and, through the use of threats, bluster, and hardball negotiations, convince them to accept less than what he owes. Time and again he has used competitors' prior lending mistakes as a lever to get what he wants. That's why he has said repeatedly that he is "the king of debt." Evidently he thought that this private experience and common sense could help in the counterintuitive arena of public debt.Prior to Trump's "clarification," Jordan Weissmann of the online news site Slate stated the case succinctly, "When a country prints its own currency, markets don't typically worry about them running out of money, and thus are willing to lend freely. ...The fact that the U.S. controls its own currency does give us flexibility when it comes to debt. If it weren't for our farcical, self-imposed debt ceiling, default would rarely, if ever, be something people seriously discussed." (5/9/16)

It seems to me that Slate was arguing that Trump doesn't really understand that we print our own money at will. There may be a great many things of which Trump is unaware, but he clearly knows where our money comes from. The difference between Trump and his critics is that he must believe there is a cost in printing too much money. Modern economists do not appear to grasp this basic concept.New York Times columnist Paul Krugman went even further. Despite the fact that he has argued that the Federal Reserve should print an unlimited supply of dollars to keep the economy afloat, he believes that the greenbacks themselves will remain precious and coveted forever, as long as reckless demagogues like Trump don't spoil the party. In his column on May 9, entitled "The Making of an Ignoramus" (which responded specifically to Trump's CNBC interview), Krugman said that Trump's default suggestion would, "among other things, deprive the world economy of its most crucial safe asset, U.S. debt, at a time when safe assets are already in short supply."That same day, during an interview with Jake Tapper on The Lead on CNN, conservative economist Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO), warned that if Trump, as president, ordered the Federal Reserve to print money to buy debt, it would "break the independence of the Fed" and undermine a Federal Reserve System that "has been the foundation of our economic success." I would ask Mr. Holtz-Eakin what exactly he believed happened with Quantitative Easing or operation twist, multi-trillion dollar programs in which the Fed purchased trillions of U.S. government bonds? Is he okay with that simply because there was no executive order compelling it? Does he expect that during the next economic downturn an "independent" Fed may refuse to buy government debt, thereby forcing the government to make unpopular budget cuts, raise taxes, or default? What planet does he live on? Perhaps it's the earth in a parallel universe where the Fed was actually the "foundation of our economic success" rather than merely a perpetual bubble blower. Any success we have managed to achieve after the founding of the Federal Reserve in 1913 has been despite the Fed, not because of it.At least some of the countless articles that have appeared on the Trump debt ideas have begrudgingly admitted that there is a potential downside to printing money as the only solution to debt management, in that it could spark inflation that passes from the "good" range of 2-4% to the "bad" range of 5% or more. In addition to the hardships that this could create for consumers, especially at the lower end of the economic spectrum, they also admit that higher inflation would constitute a "haircut" for the bondholders themselves, as they will be repaid with dollars of lesser value than those that they lent. In other words, partial defaults are possible through above the table negotiations (such as those Trump hinted at) or the backdoor channel of inflation. But they almost universally agree that the covert losses through higher inflation is the far, far better scenario than the global financial meltdown that they believe would result from an overt restructuring of U.S. debt. Or as Krugman argues in his "Ignoramus" article, "One does not casually suggest throwing away America's carefully cultivated reputation as the world's most scrupulous debtor...". In Krugman's world, "scruples" must involve never admitting the truth.I believe the opposite. Given the proven failure of debt-fueled policies to spark real growth and the monetary quagmire that will swallow us just as surely as it has swallowed Japan, a partial debt default would allow the United States to honestly deal with the mistakes of the past, break the cycle of never-ending debt, and set the stage for an actual economic recovery. Just as companies can be resurrected through the bankruptcy process, so too can a nation. Of course, this would involve a great deal of pain in the short term, both for creditors and citizens. But breaking an addiction is never easy. We are addicted to borrowing, and our creditors are addicted to pretending we can repay in full. We would all be better off if we dispel that illusion.However, Trump clearly went off the rails, even in my book, when he suggested that the United States could repurchase our outstanding debt at a discount if interest rates were to rise. On this point he drifted into pure fantasy.In his corporate career, Trump is well familiar with the technique of buying out creditors at a discount. If, for instance, a lender buys a 10-year corporate bond at a 3% rate from a company when interest rates are relatively low. If interest rates were to rise generally, the bondholder may not be happy with such a position if he knew that he could buy a 6% 10-year bond from a similar company. At that point the bondholder may be happy to resell his 3% bond back to the issuer at a discount, just so he could free up cash to get those higher rates. Similarly, the corporation may benefit from simplifying its balance sheet and retiring outstanding debt.But this scenario requires fresh cash to make the purchases. Corporations can cut into profits to find the cash, or take an infusion from new investors. But the United States has essentially no reserves from which to draw upon; we already have debt of nearly $20 trillion and, as of now, we will run massive deficits every year for the foreseeable future. The only way we could get the money to retire old debt is to issue new debt. But since such a scenario would, by definition, occur in a higher interest rate environment, there would be no benefit.Of course, Trump also overlooks the fact that a large portion of Treasury debt held by the public is short-term. There would be no need for holders of short-term debt to sell at a steep discount when they can just hold to maturity and in theory be repaid in full. Thanks to QE and Operation Twist, the lion's share of the Fed's assets are longer-dated securities. But even if Trump could raise taxes or cut spending to generate the funds necessary to buy back Treasuries held by the Fed at a discount, the Fed's losses would be invoiced to the Treasury for reimbursement. So what we gain with our right hand would be surrendered by our left.But Trump's biggest oversight is that when interest rates do rise, which would be the only environment where Treasuries would trade at a discount, the U.S. budget deficit would already be soaring. That is because not only could such an increase in rates help push the economy into a recession, if we were not already in one, but all of that low-yielding short-term debt would be maturing into a higher rate environment. So with the cost of rolling over our existing debts soaring, requiring tax hikes, spending cuts, or additional borrowing at higher rates, where would we possibly come up with the extra money to pay off principal, even if we could do so at a discount?But even with these inconsistent musings, Trump acknowledged a hint of realism that other politicians can't. He said that the U.S. economy remains extremely dependent on ultra-low interest rates, and that even a 1% increase in rates could make our budget position untenable. But Trump's policy ideas on expanding the military and shoring up social security, taking better care of our vets, building walls, rounding up and deporting illegals, and replacing Obamacare with some as yet undefined program, will require even more borrowing. To square that budgetary circle, Trump acknowledged that we have to push down the value of the dollar.In the CNBC interview, he said that a strong dollar sounds good "on paper" but that a weak currency offers much greater benefits. In fact, he credits weak currencies as the primary weapon used by China to engineer its own success. He wants to do the same for America. Of course the Achilles heel of such a plan is that a significantly weaker dollar is bound to usher in a wave of inflation that could rival, or even surpass, the 1970s. If Trump is willing to let the dollar fall steeply, the poor especially could suffer as purchasing power evaporates and poverty rates increase.But based on the opinions of economists, that is exactly the policy path for which we should prepare. Inflation and a weak dollar are the only solutions they can envision to "solve" our problems, and that is exactly what we will get. So nice try Donald, but from now on you may as well just keep talking about the Wall.

Why a popular market gauge of U.S. economic health has become more ambiguous

By Min Zeng and Ben Eisen.

A wave of money fleeing low or negative interest rates overseas is helping to push down long-term Treasury yields, hobbling a popular market gauge of U.S. economic health.The “yield curve,” measuring the premium investors receive for the risk of holding 10-year U.S. government debt, rather than two-year notes, on Tuesday declined to 0.94 percentage point, the lowest since December 2007. A year ago, the gap was 1.65 points.The curve now is said to be flattening, a condition that bears scrutiny because it could lead to a situation in which short-term rates exceed long-term ones. That happened in the U.S. in June 2007, shortly before the financial crisis, and in December 2000, ahead of the 2001 downturn.Yet some traders and portfolio managers caution that the yield curve’s predictive value may have fallen victim to the age of easy money, in which the flow of cash around the world dwarfs the economic trends that market indicators have long been taken to illuminate.

While many U.S. investors doubt the 10-year Treasury is a bargain at its recent yield of 1.75%, investors in Europe, Japan and elsewhere have been large buyers because yields available in their home countries are even lower. The pool of negative-yield bonds hit $9 trillion this month.The U.S. yield curve is "distorted because of negative interest rates abroad,’’ said Torsten Slok, chief international economist at Deutsche Bank Securities.

<strong></strong>

<strong></strong>

The failure of U.S. yields to increase in recent months, even as the recession scare early in the year ebbed, has struck many investors as a sign of foreign capital’s impact.The 10-year yield has ticked lower this month, although U.S. retail sales and consumer-sentiment data showed strength and the Federal Reserve Bank of Atlanta’s GDPNow forecasting service predicted that second-quarter U.S. economic growth would hit 2.5%. Stronger data is typically associated with higher bond yields because faster economic growth tends to push up inflation.Craig Brothers, a portfolio manager at Bel Air Investment Advisors, still keeps measures of the yield curve prominently displayed on his Bloomberg terminal. But he looks at it less as an indicator of the economy than as a measure of where investors are putting money.

While many U.S. investors doubt the 10-year Treasury is a bargain at its recent yield of 1.75%, investors in Europe, Japan and elsewhere have been large buyers because yields available in their home countries are even lower. The pool of negative-yield bonds hit $9 trillion this month.The U.S. yield curve is "distorted because of negative interest rates abroad,’’ said Torsten Slok, chief international economist at Deutsche Bank Securities.

<strong></strong>

<strong></strong>

The failure of U.S. yields to increase in recent months, even as the recession scare early in the year ebbed, has struck many investors as a sign of foreign capital’s impact.The 10-year yield has ticked lower this month, although U.S. retail sales and consumer-sentiment data showed strength and the Federal Reserve Bank of Atlanta’s GDPNow forecasting service predicted that second-quarter U.S. economic growth would hit 2.5%. Stronger data is typically associated with higher bond yields because faster economic growth tends to push up inflation.Craig Brothers, a portfolio manager at Bel Air Investment Advisors, still keeps measures of the yield curve prominently displayed on his Bloomberg terminal. But he looks at it less as an indicator of the economy than as a measure of where investors are putting money.Traders say that while this process can push yields down further than economic considerations would seem to demand, the resulting gap is vulnerable to sudden reversals."The flattening yield-curve trade is crowded,’’ said Stanley Sun, interest rates strategist at Nomura Securities International in New York.Another underrated factor: diminished supply of Treasurys as improving U.S. economic health reduces government-funding needs. In April 2016, net issuance of Treasury notes and bonds was negative for the first time since 2008, according to Mr. Slok at Deutsche Bank Securities.History underlines how difficult it can be to get a handle on the swirling dynamics of this market.A decade ago, the U.S. was running larger and larger current-account deficits and many government bonds were being purchased by China, which at the time was using U.S. Treasury purchases to help hold down the value of its currency, the yuan, and make its exports more competitive on global markets.This arrangement fueled fears that the U.S. would be vulnerable to a financing crisis if China began selling its holdings, an argument that bearish bond investors contended would vindicate bets against Treasury debt.Those concerns came to naught in the financial meltdown of 2008, which instead ignited a powerful rally in prices of safe bonds.Eight years later, China is selling its Treasurys, but few expect yields to spike imminently, reflecting in part the deflationary concerns driving the economic slowdown in the world’s most-populous nation. Meanwhile private investors have stepped into the breach.On a net basis, foreign central banks sold $302 billion U.S. Treasury notes and bonds over the 12 months through March this year, according to Deutsche Bank Securities. Foreign private investors bought a net $317 billion.Don Ellenberger, a fixed-income portfolio manager at Federated Investors, says long-term bond yields will likely remain low as the world struggles to adjust to soft growth, even without a U.S. recession.“My thought is that we are going to continue to see the curve flatten, but it is going to be a slow grind over a longer period of time,” he said.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.